Summary of AUTOBYTEL INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes," "will" and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"). Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.
You should read the following discussion of our results of operations and financial condition in conjunction with our unaudited consolidated condensed financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in the 2011 Form 10-K.
Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to the SEC.

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the 2011 Form 10-K. We have made disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The statements of operations and comprehensive income and cash flows for the periods ended September 30, 2012 and 2011 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period. The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2011 Form 10-K.

On July 11, 2012, the Company implemented a 1-for-5 reverse split of the Company's common stock, $0.001 par value per share ("Reverse Stock Split").
Trading of the common stock on a post-Reverse Stock Split adjusted basis on The NASDAQ Capital Market began on July 12, 2012. The primary reason for the Reverse Stock Split was to increase the per share price of the common stock in order to maintain compliance with The NASDAQ Capital Market's continued listing requirement that the common stock maintain a minimum closing bid price of at least $1.00 per share ("Minimum Bid Price Requirement"). Prior to the Reverse Stock Split, the Company was not in compliance with this continued listing requirement and was subject to possible delisting from trading on The NASDAQ Capital Market. On July 26, 2012, the Nasdaq Listing Qualifications staff informed the Company that the Company had regained compliance with the Minimum Bid Price Requirement.
We acquired substantially all of the assets of Cyber on September 17, 2010. The results of Cyber's operations have been included in the consolidated financial statements since that date.

Overview
We are an automotive marketing services company that assists automotive retail dealers ("Dealers") and automotive manufacturers ("Manufacturers") market and sell new and used vehicles to consumers through our programs for online purchase request referrals ("Purchase Requests"), Dealer marketing products and services, and online advertising programs and data products. Our consumer-facing automotive websites ("Company Websites"), including our flagship website Autobytel.com®, provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to submit inquiries requesting Dealers to contact the consumers regarding purchasing or leasing vehicles ("Vehicle Purchase Requests"). For consumers who may not be able to secure loans through conventional lending sources, our Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing ("Finance Purchase Requests"). The Company's mission for consumers is to be "Your Lifetime Automotive Advisor ®" by engaging consumers throughout the entire lifecycle of their automotive needs.

We measure Purchase Request quality by the conversion of Purchase Requests to actual vehicle sales. We rely on detailed feedback from Manufacturer and wholesale customers to confirm the performance of our Purchase Requests. In addition, in 2012 we began to utilize R.L. Polk data to evaluate the performance quality of Purchase Requests we generate from Company Websites as well as those Purchase Requests we acquire from third party Purchase Request suppliers. Our Manufacturer and wholesale customers and R.L. Polk match the Purchases Requests we deliver to our customers against vehicle sales data to provide us with closing rates for the Purchase Requests we deliver to our customers and information that allows us to compare these closing rates to the closing rates of the Purchase Requests we acquire from third party suppliers. Some of the data providers also provide comparisons to closing rates of Purchase Requests delivered directly to customers by the third party suppliers. Based on our evaluation of this information, we believe that the Purchase Requests we deliver to our customers generally are out-performing the closing rates of the Purchase Requests delivered by our third party Purchase Request suppliers. With this information, we report a number of key metrics to our customers, allowing them to gain a better understanding of the revenue opportunities that they may realize from acquiring Purchase Requests from us. We can now optimize the mix of Purchase Requests we deliver to our customers based on multiple sources of quality measurements.
In June 2012, we launched the mobile version of Autobytel.com. This mobile-optimized website gives consumers the opportunity to view photographs and videos, read car reviews and check pricing from their mobile devices. In addition, this mobile website has shopping tools that will allow a consumer to find a Dealer, browse inventory and request free Dealer price quotes.
Concurrent with the launch of the mobile version of Autobytel.com, we launched an enhanced dealer directory which allows consumers to find local dealers from a comprehensive list of all franchise dealers in the United States.
For the three and nine months ended September 30, 2012, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Purchase Requests and the market for advertising services, including, but not limited to, the following:
· The adverse effect of high unemployment on the number of vehicle purchasers,

· Availability of, and interest rates for, financing for vehicle purchases,

· Pricing and purchase incentives for vehicles,

· Disruption in the available inventory of vehicles,

· The expectation that consumers will be purchasing fewer vehicles overall during their lifetime,

· The impact of gasoline prices on demand for vehicles,

· Volatility in spending by Manufacturers and others in their marketing budgets and allocations, and

· The effect of changes in search engine algorithms on our Purchase Request generation and website advertising activities.

Results of Operations
 Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011

The following table sets forth certain income statement data for the three-month
periods ended September 30, 2012 and 2011 (certain amounts may not calculate due
to rounding):

                                       % of total                      % of total
                          2012          revenues          2011          revenues         $ Change       % Change
                                              (Dollar amounts in thousands)
Revenues:
Purchase requests       $  16,523                95 %   $  15,482                95 %   $    1,041              7 %
Advertising                   884                 5           784                 5            100             13
Other revenues                 47                 -            44                 -              3              7
Total revenues             17,454               100        16,310               100          1,144              7
Cost of revenues
(excludes
depreciation of $25
and $70 for the three
months ended
September 30, 2012
and 2011,
respectively)              10,739                62         9,738                60          1,001             10
Gross profit                6,715                38         6,572                40            143              2
Operating expenses:
Sales and marketing         2,035                12         2,153                13           (118 )           (5 )
Technology support          1,651                 9         1,855                11           (204 )          (11 )
General and
administrative              1,983                11         1,781                11            202             11
Depreciation and
amortization                  492                 3           419                 2             73             17
Litigation
settlements                   (68 )               -           (65 )               -             (3 )            5
Total operating
expenses                    6,093                35         6,143                37            (50 )           (1 )
Operating income              622                 3           429                 3            193             45
    Interest and
other income, net              16                 -             8                 -              8            100
Income before income
tax provision
(benefit)                     638                 3           437                 3            201             46
    Income tax
provision (benefit)            87                 -            (9 )               -             96         (1,067 )
Net income              $     551                 3 %   $     446                 3 %   $      105             24 %

Purchase Requests. Purchase Request revenue increased $1.0 million or 7% in the third quarter of 2012 compared to the third quarter of 2011 primarily due to an increase of 13% and 8% in the volume of automotive Purchase Requests delivered to new and used retail Dealers and Manufacturers and other wholesale purchasers, respectively.

Advertising. Advertising revenues increased $0.1 million or 13% in the third quarter of 2012 compared to the third quarter of 2011 due primarily to an increase in site advertising revenue.

Cost of Revenues. Cost of revenues consists of Purchase Request and traffic acquisition costs and other cost of revenues. Purchase Request and traffic acquisition costs consist of payments made to our Purchase Request providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of search engine marketing ("SEM") and fees paid to third parties for data and content, including search engine optimization ("SEO") activity, included on our properties, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company's websites. SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.
Cost of revenues increased $1.0 million or 10% in the third quarter of 2012 compared to the third quarter of 2011 primarily due to an increase in SEM costs.

Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs and other costs associated with Dealer sales, website advertising, Dealer support and bad debt expense. Sales and marketing expense in the third quarter of 2012 decreased by $0.1 million or 5% compared to the third quarter of 2011 due principally to lower headcount-related compensation costs.
Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company's websites and related technologies, and to operate the Company's internal technology infrastructure. Technology support expenses in the third quarter of 2012 decreased by $0.2 million or 11% compared to the third quarter of 2011 due to decreased personnel costs and computer software and maintenance costs. General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the third quarter of 2012 increased by $0.2 million or 11% compared to the third quarter of 2011 due to an increase in headcount-related compensation costs and franchise fees associated with the reverse stock split offset by a decrease in the liability associated with a contingent fee arrangement.
Depreciation and amortization. Depreciation and amortization expense increased $73,000 in the third quarter of 2012 compared to the third quarter of 2011 primarily due to impairment of a long-lived asset in addition to fixed asset additions during the year.
Litigation settlements. Litigation settlements for the third quarter of 2012 were $68,000 compared to $65,000 in the third quarter of 2011. Income taxes. Income tax expense was $87,000 in the third quarter of 2012 compared to income tax benefit of $9,000 in the third quarter of 2011. The current quarter tax expense related to various state taxes and the deferred tax liability related to tax deductible goodwill amortization. Income tax benefit of $9,000 in the third quarter of 2011 related to provision adjustments related to the finalization of 2010 state and federal tax returns which resulted in a tax benefit offset by various state taxes and the increase in the deferred tax liability related to tax deductible goodwill amortization.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

The following table sets forth certain income statement data for the nine-month periods ended September 30, 2012 and 2011 (certain amounts may not calculate due to rounding):

                                       % of total                      % of total
                          2012          revenues          2011          revenues         $ Change       % Change
                                              (Dollar amounts in thousands)
Revenues:
Purchase requests       $  47,077                94 %   $  44,635                94 %   $    2,442              5 %
Advertising                 2,670                 6         2,772                 6           (102 )           (4 )
Other revenues                144                 -           182                 -            (38 )          (21 )
Total revenues             49,891               100        47,589               100          2,302              5
Cost of revenues
(excludes
depreciation of $90
and $211 for the nine
months ended
September  30, 2012
and 2011,
respectively)              30,004                60        28,496                60          1,508              5
Gross profit               19,887                40        19,093                40            794              4
Operating expenses:
Sales and marketing         6,648                13         6,782                14           (134 )           (2 )
Technology support          5,098                10         5,241                11           (143 )           (3 )
General and
administrative              5,772                11         5,809                12            (37 )           (1 )
Depreciation and
amortization                1,295                 3         1,369                 3            (74 )           (5 )
Litigation
settlements                  (205 )               -          (393 )              (1 )          188            (48 )
Total operating
expenses                   18,608                37        18,808                39           (200 )           (1 )
Operating income            1,279                 3           285                 1            994            349
    Interest and
other income, net              12                 -            31                 -            (19 )          (61 )
Income before income
tax provision               1,291                 3           316                 1            975            309
    Income tax
provision                     256                 1           241                 1             15              6
Net income              $   1,035                 2 %   $      75                 0 %   $      960          1,280 %

Purchase Requests. Purchase Request revenue increased $2.4 million or 5% in the first nine months of 2012 compared to the first nine months of 2011 primarily due to an increase of 5% and 9% in the volume of automotive Purchase Requests delivered to new and used retail Dealers and Manufacturers and other wholesale purchasers, respectively.

Advertising. Advertising revenues decreased $0.1 million or 4% in the first nine months of 2012 compared to the first nine months of 2011 due primarily to timing delays of certain Manufacturer direct marketing campaigns.

Cost of Revenues. Cost of revenues increased $1.5 million or 5% in the first nine months of 2012 compared to the first nine months of 2011 primarily due to an increase in SEM costs.
Sales and Marketing. Sales and marketing expense in the first nine months of 2012 decreased $0.1 million or 2% compared to the first nine months of 2011 due to lower headcount-related compensation costs and lower consulting fees. Technology Support. Technology support expense in the first nine months of 2012 decreased by $0.1 million or 3% compared to the first nine months of 2011 due to decreased computer and software maintenance.
General and Administrative. General and administrative expense in the first nine months of 2012 was $5.8 million in both the first nine months of 2012 and 2011. Depreciation and amortization. Depreciation and amortization expense decreased $74,000 or 5% in the first nine months of 2012 compared to the first nine months of 2011 primarily due to assets becoming fully depreciated related to MyRide after the third quarter of 2011 and certain capitalized software becoming fully amortized by the third quarter of 2011 offset by impairment of a long-lived asset and fixed asset additions during the year.
Litigation settlements. Litigation settlements for the first nine months of 2012 were $205,000 compared to $393,000 in the first nine months of 2011.
Litigation settlements for the first nine months of 2011 included the settlement of an arbitration claim seeking indemnification from a third party supplier relating to the third party's method of soliciting Purchase Requests.
The arbitration settlement represented the recovery of legal fees and other related expenses previously expensed under General and Administrative operating expenses.

Income taxes. Income tax expense was $256,000 in the first nine months of 2012 compared to income tax expense of $241,000 in the first nine months of 2011. The current tax expense related to the New York state income tax audit assessment, other state taxes and the deferred tax liability related to tax deductible goodwill amortization. Tax expense in the first nine months of 2011 related to various state taxes and the increase in the deferred tax liability related to tax deductible goodwill amortization offset by provision adjustments related to the finalization of 2010 state and federal tax returns which resulted in a tax benefit.

Liquidity and Capital Resources
The table below sets forth a summary of our cash flows for the nine months ended
September 30, 2012 and 2011:

                                                               Nine Months Ended September 30,
                                                                  2012                 2011
                                                                        (in thousands)
Net cash provided by operating activities                      $     4,369         $        120
Net cash (used in) provided by investing activities                   (224 )                203
Net cash (used in) provided by financing activities                 (1,648 )                101

Our principal sources of liquidity are our cash and cash equivalents balances and positive operating cash flow. Our cash and cash equivalents totaled $13.7 million as of September 30, 2012 compared to cash and cash equivalents of $11.2 million as of December 31, 2011.
Net Cash Provided by Operating Activities. Net cash provided by operating activities in the nine months ended September 30, 2012 of $4.4 million resulted primarily from net income of $1.0 million, as adjusted for non-cash charges to earnings, in addition to a $2.2 million increase in our accounts payable balance offset by a $1.3 million decrease in our accounts receivable balance related to the timing of payments received from our customers. Net cash provided by operating activities in the nine months ended September 30, 2011 of $0.1 million resulted primarily from net income of $0.1 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $1.0 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2010 and paid in the first nine months of 2011 and a $2.1 million decrease in our accounts receivable balance related to the timing of payments received from our customers.
Net Cash (Used in) Provided by Investing Activities. Net cash used in investing activities was $0.2 million in the nine months ended September 30, 2012 primarily related to net changes in a certificate of deposit used to secure the processing of certain SEM activity offset by purchases of property and equipment. Net cash provided by investing activities was $0.2 million in the nine months ended September 30, 2011 and is primarily related to cash received on our long-term strategic investment offset by the investment in upgrading our internal information technology infrastructure.
Net Cash (Used in) Provided by Financing Activities. Stock options for 9,482 shares of stock were exercised in the nine months ended September 30, 2012 resulting in $22,000 cash inflow. Net cash used in financing activities in the nine months ended September 30, 2012 consisted of contingent payments of $217,000 related to the Cyber acquisition and $1.5 million used to repurchase 379, 811 shares of our common stock. Stock options for 85,101 shares of stock were exercised in the nine months ended September 30, 2011, resulting in $0.4 million of cash inflow. In addition, $250,000 of contingent payments were made related to the Cyber acquisition in the nine months ended September 30, 2011.
Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price, and amount of stock option exercises.

Off-Balance Sheet Arrangements
At September 30, 2012, we had no off-balance sheet arrangements as defined in Regulation SK, Item 303(a)(4)(D)(ii).